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This is an example of how you can buy a note and improve it. It’s called “recasting” a cash flow. You change the terms to increase the note’s Present Value. Follow along with your calculator and you will find out that it is easier to “fix-up” a note than to “fix-up” a piece of real estate; and it is more lucrative (and there are no tenants or stopped up toilets.)

Rockee Smyth brought this note to us. He had taken one of our classes we offer every month. We had pointed out to him that one could very nicely to one’s income by finding notes for sale and bringing them to us. We would pay a finder’s fee of one percent of the price if we decided to purchase the note. Well, Martin, who had more energy and imagination than time and money, put an ad in a local neighborhood newspaper and soon got a call on the following note. Ricardo and Maria Ceuvas had sold their home several years ago and taken back a note on the property. The original terms were as follows:

N I PV PMT FV

180 9% $56,200 $570 $0

Five years had past by and now the note looked like this:

N I PV PMT FV

120 9% $45,000 $570 $0

Mr. Ceuvas had an opportunity to open up an auto repair place with his brother-in-law and needed the cash to do so. We always like to make at least two offers and preferably three, but we knew in this case, he wanted as much money as he could get. Since this was a first, we knew this note would qualify for an institutional lender. The home had originally sold for $70,250, so we knew the ITV would be way below the 75% that most institutional lenders require on an owner occupied house. So we decided on an 18% offer, knowing we could sell it at 13%. We did make two offers and as usual we made the partial offer at a higher per cent (21%) as follows:

Full purchase:

N I PV PMT FV

120 18% $31,636 $570 $0

Partial purchase:

N I PV PMT FV

60 21% $21,069 $570 $0

As we already suspected, Mr. Ceuvas took the first offer. We did the usual appraisal, credit report, and going through the original title company, we did a 104.1 endorsement (ask your title officer how you can save money with this endorsement) and completed the transaction.

Now the fun began. First of all, we knew that we would get more money by buying the note and then turning around and selling it than by just brokering to an institutional investor. We knew that if we rescheduled the note, we could get even more money for the note. The following is what we would get by just selling as it was structured:

N I PV PMT FV

120 13% $38,178 $570 $0

1. Our first strategy is to tell the Santinis, the payors, that if they would increase their payments to $1000 per month, they could pay off their loan only 55 months and save themselves $13,300 in interest payments over the life of the loan. Even though most people won’t bite at this, we have had people who are anxious to pay off their loan early and will agree to this proposal.

2. In fact, the Santinis ignored this proposal so a month later we sent them another letter in which we offered to reduce their balance due by 10% or $4,500 if they would pay off the loan in the next 30 days. We suggested that they refinance or use an equity loan. We even gave them the name of a mortgage broker they could call who would help them find a new loan. This technique often works especially if it’s a substantial savings like $4,500. However, in this case the Santinis were uncomfortable about refinancing and again didn’t bite at this offer.

3. A month later we decided to change our strategy and give them two offers to choose from rather than one offer to accept or reject. We decided to go with higher monthly payments in exchange for a lower interest rate.

Here are the two offers:

N I PV PMT FV

45 7% $45,000 $1,140 $0

We lowered the rate to 7% and doubled the payments to $1140. We pointed out that not only would they pay off the loan in only 45 months, but they would also save over $17,000 in interest payments over the life of the loan.

What would our institutional investor now pay for these new terms?

N I PV PMT FV

45 13% $40,428 $1,140 $0

By doing this we increase the value of the note from $38,178 to $40,428!

N I PV PMT FV

27.93 5% $45,000 $1,710 $0

We lowered the interest rate to 5% and tripled the payments to $1710. Again we pointed that they could pay off the loan in only 28 months and save over $20,000 in interest payments!!

What would our institutional investor pay for these new terms?

N I PV PMT FV

27.93 13% $41,023 $1,710 $0

By doing this we increase the value of the note from $38,178 to $41,023!

Perhaps we just wore the Santinis down or we finally gave them an offer they couldn’t refuse. They chose (a), and we sent them a revised contract with the new terms which they signed and returned. We immediately went to our institutional investor, and they accepted the note at 13% for $41,023.

Question: Wouldn’t the institutional investor in this case ask, and balk about the lack of seasoning of the note at the post recasted amount, as the Santinis did not have a record of payment at the new higher (you doubled their payments) monthly note amount?